San Francisco Examiner, Business Section, Tuesday, March 28, 1995


How to Deal with IRS Demands

(Second of Two Parts)

Editor's note: In Sunday's Examiner, Robert Sommers explained taxpayers' rights when confronted with a potential; audit by the Internal; Revenue Service. Today: How to handle delinquent tax notices and audits.

WHAT should you do if you receive a notice of delinquent taxes from the IRS? First, don't panic. Remember you have rights, and take things one step at a time.

Going through an audit

Generally, an IRS audit starts with an examination of your tax return for a specific year. Verification of income and expenses is often the initial focus. If you can satisfy the audit requested by proper documentation, merely sending the IRS the annual statement from your lender will suffice.


  1. Most tax shelter deductions.
  2. Personal expenses versus business or investment expenses.
  3. The appropriate tax year for income or deductions.
  4. Classifying workers as independent contractors or employees.
  5. Disputes involving the "character" of income, losses or expenses -- capital gains versus ordinary income, taxable income versus a non-taxable gift.
  6. Classifying passive activities, portfolio interest and investment interest.

Your rights on appeal

If the auditor makes an adverse determination, the taxpayer may appeal. At this point, employ a tax expert. The appellate division of the IRS is experienced and pragmatic, and disputes are often compromised in a businesslike manner.

If the taxpayer presents a strong case, the appellate officer will invariably acknowledge the taxpayer's position and close the case. If the matter cannot be resolved, the IRS will then issue a notice of deficiency.

This is the final step in the administrative process and prerequisite to the assessment of additional tax. Once you receive a notice of deficiency, you have three choices: Pay the tax without further contesting it; petition the Tax Court for a redetermination of the tax within 90 days of receipt of the notice of deficiency; or pay the tax and sue for a refund in federal District Court or the Court of Claims in Washington, D.C.

If you do nothing, the IRS will assess and collect the tax once the 90-day period expires. Petitioning the Tax Court is your most sensible option. Once the Tax Court petition is filed, the IRS can't collect the alleged deficiency until a decision is final; the IRS will have its appellate branch try to settle the case before trial.

The drawback to the Tax Court is that its jurisdiction lasts only 90 days, beginning on the date the notice of deficiency is mailed. If you ignore this critical deadline (as too many taxpayers do), you are left with little recourse except to pay the taxes, penalties and interest in full (an impossibility if the amount is too high), and later sue for a refund in federal district court or the Court of Claims.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**